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Private equity stake to prep CFS for full sale

A major bank’s sale of a majority stake in its super business to a private equity firm is likely to see the business come out leaner and more profit focused ahead of a full sale further down the track, analysts have said.

A new report from research firm Morningstar said the sale of a 55 per cent stake in Commonwealth Bank’s super arm, Colonial First State, to global private equity group KKR was “a positive first step to realise as much value for shareholders as possible”, after the bank put a full demerger of the business on hold due to the fallout of the royal commission.

“Ultimately, we believe the bank and KKR will focus on improving financial returns of the business and once customer remediation issues are resolved, look for a complete exit,” the research firm said.

The report flagged that with Westpac likely to put its own wealth management business on the market imminently, Commonwealth Bank was smart to make quick progress in the sale of CFS, which was due to complete in 2021.

In addition, the research firm said the decision to divest from wealth management was logical given this did not provide the bank with a competitive advantage.

“We do not believe the loss of wealth management or insurance product cross-sell materially weakens the switching cost advantage, with a transaction account, mortgage, personal loan, credit card, business loan the stronger pillars behind customer retention,” Morningstar said.

“Given the potential for dissatisfaction with financial advice or poor investment returns, we do not believe the offering helped strengthen the [competitive] moat.” 

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More broadly, Morningstar said with the bank having the highest level of provisioning before the crisis, it was likely to escape the worst of the coming recession without having to raise further capital or forego dividends.

Its updated debt provisions also assumed a higher credit risk level than the other major banks, which would ensure it was well positioned to ride out the economic storm ahead, the research firm said.

“Organic capital generation, albeit smaller than usual, plus funds received from the CommInsure Life divestment provided some offset to the capital headwinds,” Morningstar said.

“Commonwealth Bank expects another 0.5 per cent to 0.6 per cent uplift to capital from future divestments, which is expected to take capital ratios up to 11.7 per cent.”

Further, excluding loan loss provisions, the bank had actually increased its most recent profit result compared with previous quarters, the report stated.